What is a credit score?: A beginner’s guide
September 27, 2022 4 min read
Credit scores are essentially snapshots of a person’s credit history. And they can affect everything from lending decisions and loan terms to rental applications and insurance premiums.
But how are credit scores calculated? What qualifies as a good credit score? And how can you build and maintain good credit scores? Read on to learn more.
- Credit scores reflect a person’s creditworthiness and how likely they are to pay back their debts on time.
- Credit scores are used in lending decisions and can affect other things too.
- Credit reports are used by credit-scoring companies to calculate credit scores.
- The higher the credit score, the better.
What is a credit score, and what is it used for?
Credit scores are a reflection of creditworthiness and are used to predict how likely a person is to pay their debts on time. A person’s scores are based on their credit history, which is compiled into credit reports by credit bureaus—also known as credit reporting agencies—like Equifax®, Experian® and TransUnion®.
- Landlords may check credit scores as part of rental applications.
- Insurers may consider credit to determine premiums.
- Cellphone and utility providers may waive security deposits if they see good credit scores.
How is a credit score calculated?
Credit scores are calculated based on the different factors in your credit reports. These factors are:
- Payment history: How well you’ve done with making payments on time
- Debt: How much unpaid debt you currently have across all of your accounts
- Credit age: How long you’ve had your accounts open
- Credit mix: The different types of credit accounts you have
- New credit applications: How many times you’ve recently applied for credit
How exactly these factors affect your scores depends on the credit-scoring model—a mathematical formula used by a credit bureau—and the company doing the scoring. A model might use information from a combination of different credit reports or from just one report. Then, each credit-scoring model might assign different levels of importance to that information.
FICO® and VantageScore® are the two credit-scoring companies that provide some of the most commonly used scores. But keep in mind that you have many different credit scores that different lenders use. And as the Consumer Financial Protection Bureau (CFPB) explains, “Your score can differ depending on which credit reporting agency provided the information, the scoring model, the type of loan product, and even the day when it was calculated.”
What is a good credit score to have?
What’s considered a good credit score depends on a variety of factors—like where the score comes from, who calculates it and who’s judging it.
But generally speaking, the higher the credit score, the better.
Good FICO credit scores
FICO scores that range between 670 and 739 qualify as good scores.
Good VantageScore credit scores
VantageScore considers good scores to be those between 661 and 780.
How do I build my credit score?
According to the CFPB, here are a few keys to using credit responsibly:
- Always pay your bills on time.
- Stay well below your credit limits. Experts recommend keeping your credit utilization below 30% of your available credit across all your credit card accounts.
- Apply only for credit you need. If you apply for multiple credit cards and loans over a short period of time, lenders may think your financial situation has changed for the worse.
It’s also important to regularly monitor your credit so you can see where you stand and keep an eye on the factors that impact your scores.
With CreditWise from Capital One, you can access your free TransUnion credit reports and weekly VantageScore 3.0 credit score anytime—without negatively impacting your score. You can even see the potential impacts of financial decisions on your credit score before you make them with the Credit Simulator.
CreditWise is free and available to everyone—not just Capital One account holders.
Credit scores in a nutshell
Credit scores are a reflection of a person’s credit reports and credit history. Scores are used to predict how likely someone is to pay their debts on time. And they can affect lending decisions and loan terms as well as things like rental applications and insurance premiums.
The higher the credit score, the better.